Our component accounting factsheet sets out the findings from a survey carried out by Grant Thornton, to the housing sector about their experience of component accounting to date.

1. Component Accounting
Survey 2012

2. Component Accounting
Survey 2012
As we draw nearer to What components are being used? roofs varies from 25 years to 75 years
We expect that housing associations across the responding population.
year-end and the adoption
have now concluded on the type The wide range of UEL reflects the
of SORP update 2010, and number of components. 67% differing replacement strategies
housing associations of respondents are separating 6-9 applied by housing associations,
across the sector are individual components. This majority which could be due to different types
collating historic data is slightly higher than at the last survey, or ages of property or quality of the
which may be as a result of associations components fitted.
for calculating the being further down the component
component accounting accounting process. Table two: useful economic lives
adjustment and assessing 160
Maximum Minimum Average
the impact on the
140
Table one: types of components
120
financial statements. 100% 100
80
80% 60
40
We expect that the
60%
20
40% 0
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The key points to note from the above
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component accounting analysis of UEL on components are
as follows:
and that finance & asset The trends in components are very
similar to the previous survey with • 70% of respondents will be
management teams will depreciating windows & doors
roofs, windows & doors, kitchens
be well progressed in and bathrooms being the most over a period of at least 30 years,
gathering data. popular components. making this generally the longest life
A number of respondents component outside of fabric and roof
highlighted that ‘renewables’ (e.g. PV/ • the spread of UEL on kitchens is not
This factsheet sets as significant as other components
solar panels & insulation) were being
out the findings from a accounted for as separate components. with 60% opting for the average life
survey carried out by This is likely to become more relevant of 20 years
Grant Thornton, to which in the coming years. • bathrooms have generally been
assigned a longer life than kitchens,
there were 61 respondents
Rate of depreciation? with an average of 27 years compared
who collectively own/ to 24 years for kitchens. Some
The useful economic life (UEL)
manage over 400,000 of components should be derived organisations are using a life as high
properties. We have also in conjunction with the asset as 35-40 years for bathrooms
• there is a high spread of UEL
used anecdotal evidence management or replacement strategy
of the association. The results of this for ‘mechanical systems’ and a
from discussions with our relatively low average life of 24
survey have highlighted that there is
clients over the past generally a wide range of UEL for each years, which could reflect that some
six months. component. For example, the UEL of associations include boilers within

3. this component and are weighting availability of accurate historic data and resource and, notably, 40% of
(shortening) the UEL accordingly the resulting impact on the calculation respondents used external resources
• there is a range from 50 years to of the prior year adjustment. such as consultants and temporary staff.
150 years in relation to the UEL of The majority of associations (81%)
the main fabric, the average though Table four: years of detailed available data that responded to our survey are
of 90 years is as would be expected. planning to maintain component data
20%
11% 1 - 3 years at an individual property level, which
One potential implication of 4 - 6 years
is clearly a detailed approach. This high
component accounting could be to level of detail is perhaps reflected in the
7 - 9 years
increase the life of the fabric/structure, 41% estimation of the time to be spent on
28%
given that the shorter life components 10 years+ component accounting this year but
are now held separately. However, our also perhaps indicates a closer link to
survey results suggest that only 16% are asset management and records
expecting to use an increased UEL for 56% of respondents are expecting going forward.
the structure and the majority of these to experience difficulty in obtaining
expect to increase the UEL by less than historic data. The effect of this is that Table six: number of hours spent
10 years. implementing component accounting
over 50% have detailed records for less
than 6 years. 0 - 15 days
Impact of adoption? The gaps in historical data will 16%
33% 16 - 40 days
The adoption of component accounting undoubtedly lead to assumptions and
is expected to increase capitalisation judgements being required to be made 21% 41 - 70 days
across the sector. However, to counter by associations in the calculation of the 71 - 99 days
9%
this, the annual depreciation charge prior year adjustment. One potential 21%
over 100 days
is expected to be substantially higher. implication would be the need to use
Our survey results have confirmed external matrices or benchmarks.
this expectation with 75% of 50% of the associations responding
respondents expecting to have increased to our survey are planning to use 33% of respondents expected to
capitalisation levels. external matrices or benchmarks. The invest over 100 days on this first time
matrices are useful as a guide when less adoption of component accounting.
Table three: impact of prior year adjustments information is available, however the
on reserves
applicability of the information to the There may be a causal link between
individual association must always the fact that of those expecting to incur
28%
be considered. more than 100 days, 63% only had data
Increase in reserves
34%
going back 4-6 years and 68% were
Decrease in reserves
Resource implications going to need to use external matrices.
Don’t know yet It is inevitable that the first time In addition to the staffing
38% adoption of component accounting implications, associations have been
will have resource implications considering whether new software
for associations. systems are required to manage
81% of respondents to our survey component accounting in future years.
Table five: has additional resource 65% of the responding population have
are expecting a prior year adjustment
been required
to be required on adoption of purchased new software systems.
component accounting. 12% Yes (consultants)
Impact on loan covenants?
Yes (temporary staff)
There were a number of associations Initially, one of the major risks expected
48% 28%
(28%) responding to our survey who Yes (internal staff) on adoption of component accounting
are yet to conclude on whether the No
was whether there would be any
12%
prior year adjustment would increase implications for loan covenants.
or decrease reserves. 38% of the As expected, the proportion of
respondents are expecting a decrease associations that have had initial
The results of the survey have
in reserves. discussions with lenders has increased
highlighted that a number of
from 20% at the last survey to 66%
associations have invested in
Adequacy of historical records?
in the current survey. Only 8% of
additional resource to produce the
The main challenge on adoption the respondents had not yet had any
component accounting numbers. 52%
of component accounting is the discussion with lenders.
of respondents required additional

4. Table seven: have loan covenants been • Treatment of excess grant – those
To discuss the contents of this
affected by the adoption of component associations that have received high
accounting factsheet or for more information
levels of social housing grant in the
please contact:
past have had to consider how to
treat the excess when grant is higher
26% 26%
Yes Jenny Brown
than the cost of land and structure.
No
Head of Housing
The key consideration is whether
jenny.m.brown@uk.gt.com
Not known yet to reallocate the grant across
48% all components.
Arthur Merchant
Senior Housing Adviser
The SORP update 2010 leaves the
Surprisingly 48% of respondents do arthur.merchant@uk.gt.com
above areas open for associations to
not believe component accounting
apply, following discussion
will affect loan covenants. This could Geraint Davies
with their auditors, the approach
be due to the number of cash flow Lead South West Housing contact
that is most appropriate to their
based covenants in the sector or due to geraint.davies@uk.gt.com
particular circumstances.
successful negotiation by associations
with lenders regarding the impact of Kyla Bellingall
The next steps?
component accounting. Lead Midlands Housing contact
As highlighted above, the adoption of
kyla.bellingall@uk.gt.com
component accounting is expected to
Other considerations
require significant assumptions and
In our experience, the majority of Paul Naylor
estimates to be made by associations.
associations have an agreed component Lead Anglia Housing contact
We would expect the Audit Committee
accounting approach and are a long way paul.naylor@uk.gt.com
and the Board to review and approve
down the road to calculating the prior
these key assumptions and consider
year adjustment (where applicable). Judith Newton
how sensitive these are to
There have been two main areas of Lead Central Housing contact
reasonable changes.
continued debate over the past few judith.newton@uk.gt.com
Once the component accounting
months, as follows:
adjustments have been finalised and
• Allocation of valuation – those Graham Nunns
audited, attention will turn to ensuring
associations that hold housing Lead North East Housing contact
that the disclosures in the financial
properties at valuation have been graham.nunns@uk.gt.com
statements are adequate. We will
considering the basis for allocating
include some suggested disclosures in
the movement in valuation i.e. is this Toby Wilson
our model accounts, due to be released
to land, to land and structure or, in Lead North West Housing contact
in March 2012.
rare cases, to other components toby.wilson@uk.gt.com
as well.
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